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By Stuart Burns

We have written recently about the state of the global aluminum market and in the process have mentioned that one reason Chinese smelters have not closed under the pressure of globally low prices and oversupply has been the support they receive from state governments and Beijing.

These can take the form of subsidized power contracts, favorable tax treatments and low-interest loans, to name but a few.

Two articles out this week highlight yet another step local governments are taking, detailing a stockpiling program started by the government of Yunnan province to help metals producers facing falling prices and sales.

Reuters advises that the program is motivated by the provincial government's desperate need to keep smelters running in order to maintain tax revenue.

No official announcements have been made, but the news organization understands the intention is to help take up some of the glut in the market and offer a lift to domestic spot prices in the near term.

The plan is said to cover 200,000 tons of aluminum, 20,000 tons of copper and 50,000 tons of zinc, while minor metals will make up the rest of the planned 300,000 tons. Small beer, compared to the State Reserves Bureau stockpiling program of 2009 or Yunnan's own program at that time that ran to 150,000 tons of copper alone, according to the Financial Times, but still highly illustrative of the pain Chinese metals producers are facing and the extent of the slowdown in domestic demand.

The FT helpfully explains how this process differs from the 2009 outright stockpiling program.

Under this program, producers will be able to draw subsidized loans from banks using their material deposited with the state as collateral. Banks will give the companies loans based on preset "purchase" prices for the commodity, and the Yunnan government will subsidize the process by paying for the interest on the bank loans.

The system is designed to help smelters by providing them with more liquidity as financing gets more difficult and sales in the market stall.

Analysts said Yunnan's program was unlikely to have a big impact on prices because the volumes covered are small, but the purchase price for copper under the program is Rmb 60,000 a metric ton, according to sources quoted, which is slightly above front-month Shanghai Futures Exchange copper prices of Rmb 59,300 on Tuesday.

The program is expected to continue until the end of the year in its current guise, but if markets continue to slow, may be extended next year and is likely to be copied, if not already in action, at other provinces around the country.

Neighboring provinces will not want to see "competitor" smelters supported when theirs are not - they all need the tax revenue and they will all want to see their smelter capacity intact for when growth returns.

Yet it presents further evidence (as if any were needed) that China's metal smelting industry is not going to be providing the cuts needed by an oversupplied aluminum, zinc and other base metals global market.

Source: Non-Ferrous Metal Stockpiling In China Supports Producers